My Mortgage Blog

At the end of last week, I suggested that we should watch silver and gold very closely, along with the movements of the 10-year T-note. Over the past week, the T-note, gold and especially silver put on quite a show. Most commodities tumbled, especially on Thursday (the day before the relatively favorable data on April employment was released).

Oil prices fell nearly 9% on Thursday, and the whole CRB Index—measuring a large basket of commodity prices—fell 4.9%. Silver fell about 8% on the day, and 27.4% over the course of the week (where gold lost 4.2%). Clearly, it was silver’s turn to do a spectacular swan dance, causing many analysts to say that the tremendous investor interest in the metal (which had gained 171% in value over the past year) had created a bubble. And this past week, it apparently popped.

There are plenty of analysts who disagree, of course. Many who are certain they can feel inflation’s hot breath on their necks say that we are simply seeing a temporary correction in commodities markets—especially in the silver market—and that the demand for commodities will soon bring prices back to where they were. Call it, in other words, a great buying opportunity.

Others call it a great selling opportunity, either because they believe prices will fall further, giving us an even better chance to buy back into the markets in the future. And others feel it’s a great selling opportunity, allowing us to rid ourselves of commodity holdings before they fall a great deal further.

And yet others see it as a time to wait patiently for the recovery to continue asserting itself, taking interest rates gradually higher and bringing commodity prices back into more normal ranges relative to other prices.

In other words, in a market where most people are very confident of their positions, it’s nonetheless especially difficult to find anyone—certainly not me, for instance—who has a very clear idea of what is transpiring. As Harvard economist Gregory Mankiw put it this past weekend, “If you find an economist who says he knows the answers, listen carefully, but be skeptical of everything you hear.”

We do know a few things. The silver market was showing increasing volatility a couple of months before this past week began and many institutional investors had quietly sold off holdings, leaving private investors like you and me to keep the silver bird flying ever higher. Clearly, it was something of a bubble, reminiscent of a stock like Qualcomm in the weeks (many years ago) before it tanked.

But was it the canary in the mineshaft, suggesting weakness in all commodity prices, or was it the standout self-immolation, suggesting nothing about the rest of the market? Silver is always an unusual investment. Unlike gold, its value arises from industrial and commercial uses of the metal. It isn’t just an alternative currency. (Just, you say?) It often gains great value long after gold has started a lengthy rise. And it’s even more volatile than gold, as a rule.

We also have the April employment report to consider, and the killing of bin Laden, but these matters—as freighted with confusion and political dynamite as they may be—don’t really have much to do with silver. The number of the employed apparently fell while the number of new payrolls rose and about the same number of people were seeking jobs. That doesn’t work out mathematically, so I’m inclined to smile patiently at the jobs report but to wait for more data before I start to talk about an improving jobs market.

What’s most interesting to me, therefore, is whether commodity prices recover or continue to fall. I doubt at this point that we’ll have economic indicators that truly mean something solid to us until QE2 has been put into dry docks and the Fed stops tinkering so much with the credit markets. Meanwhile—we have very workable mortgage rates again…but do not take them for granted. They could turn on a dime.